You’re too small to worry about this, right? Could well be wrong, read on.
We do “cost plus 5%”, that’s okay, right? Could well be wrong, read on.
Our industry-sector area is not caught. That is very likely just wrong!
These are just a few of the typical misconceptions once the subject of transfer pricing raises its head.
What is transfer pricing? And why?
Boring tax compliance right? Sort of….
The OECD (and UK) transfer pricing code is designed to ensure that, for tax purposes, transaction prices-values between connected companies are not manipulated such that taxable profits are understated in the UK. This is the statutory compliance obligation – it can be as simple as you don’t need to do anything else or extra, or perhaps “cost plus 5%” is fine. Of course, the compliance requirements could also be far more demanding.
However, our typical, client-targeted, functional and risk report review (as part of a transfer pricing review) can often actually identify real intragroup pricing efficiencies. For instance, we may be able to define a range of acceptable arms-length transfer prices for your particular intragroup transactions – positioning higher or lower within the range could create significant cost and tax advantages to your group.
We might identify that there is no cross-group (or fair) recognition of the IP and/or R&D being executed in one outlier of your corporate group. That could lead to new income streams and a fairer recognition of corporate innovation, reward, and risk across the group.
Is transfer pricing even relevant to us?
As UK-based company, and as part of a corporate group, then you need to consider whether you are subject to the full force of UK HMRC transfer pricing rules.
We say “full-force” – what that means is that all such intragroup transactions are required to be booked for UK tax purposes at the arm’s-length price (or within the arms’ length price range) and you must maintain a comprehensive set of documentation consistent with what HMRC requires to be maintained, to avoid penalties. “Full-force” is not applicable to many UK companies, largely because they (and the group they are part of) are too small – commonly known as the “SME Exemption”.
To qualify for SME Exemption, broadly, a group (measured using special EU rules!) must have less than 250 employees and either an annualised turnover of less than Euro 50m or a BS, that is total assets (no deduction for liabilities), of less than Euro 43m. The way the group is measured is not “typical” under these rules – if you are close to the thresholds, ask us to help you do the measurements. And be warned, even if you are below the thresholds, you may still not qualify for SME Exemption. So:
If you transact, intragroup, with a company in a non-qualifying territory then the SME exemption is not available – these NQ territories include Channel Isles, Isle of Man, Cayman Island, British Virgin Islands, Bermuda, Hong Kong. Okay you may not be trading with these. But does your intragroup finance arise in one of these jurisdictions? Or do you benefit from (or provide) a cross-group financial guarantee, that your UK company benefits from? Or you use or provide a brandmark or trademark or other intellectual property right involving an NQ territory?
And crucially, what do the home tax rules of your intragroup trading partner require them to do for transfer pricing purposes? For instance in the US, Australia, there is no SME exemption. So the IRS or the AOT may insist that local CT returns (reflecting transactions with you in the UK) must disclose tax profits computed on an arms- length basis. If an adjustment is made to the tax profits in US or Australia, then you could well (as a group) end up paying CT twice on some profits. And so there is a mechanism to claim corresponding relief in the UK – it gets complicated, but the bottom line is you may need to provide documentation to support a corporate compadre in USA or Australia (in this example). To create certainty your group may feel an Advance Pricing Arrangement, negotiated with the respective tax authorities, is the best way forward.
Who can offer my company transfer pricing solutions?
As an active member firm of UHY International, and with our own practical experience in providing transfer pricing solutions, we can offer comprehensive support on your transfer pricing needs. Through our hub offices in Detroit and Madrid, we provide you with benchmarking analyses to provide an arm’s length intercompany pricing for tangibles, services, and royalties for all industries. We also prepare transfer pricing documentation reports and benchmarking memos under, amongst others, the US regulations and OECD guidelines, and for clients for global transactions, help them maintain economic consistency while meeting local regulatory requirements.
For a no-obligation first discussion please call our International Tax Director, David Jones, on 01235 251252 or tell David a little about your enquiry.